Extract from ABC News
Analysis
By business reporter Nassim Khadem
This week, the United States signalled a major shift on tax policy.
Treasury Secretary Janet Yellen told the Chicago Council on Global Affairs there had been a "30-year race to the bottom on corporate tax rates".
The United States, she said, was now "working with G20 nations to agree to a global minimum corporate tax rate that can stop the race to the bottom".
This idea, which aims to discourage multinational companies from shifting profits to low-tax countries (regardless of where their sales are made), has been floating around for some time.
But with the US on board, it could finally end an impasse on how to collect more tax from multinationals including Amazon, Apple, Facebook and Google.
Various groups have raised the idea of a global minimum tax since the 2013 publication of the OECD/G20 Base Erosion Profit Shifting (BEPS) plan that aims to get more tax from multinationals.
More recently the idea has been promoted by renowned economists including Thomas Piketty and Joseph Stiglitz, who are both involved with the Independent Commission for the Reform of International Corporate Taxation (ICRICT). It wants to see a minimum tax rate of 25 per cent applied globally.
While countries could still set whatever tax rates they choose – the way the minimum rate would work is that if companies pay lower rates in a particular country (say Ireland where the tax rate is 12.5 per cent) their home governments (say the United States) could "top-up" their taxes to the agreed minimum rate.
This would eliminate the reward for multinationals to shift profits to lower tax jurisdictions and thereby stop depriving governments of much-needed revenue.
More than $US200b in tax revenues lost each year
According to a March report from researchers Javier Garcia-Bernardo and Petr Janský, by shifting $US1 trillion ($1.31 trillion) in profits from the countries where their economic activity takes place to a small number of tax havens, in 2016 alone multinational corporations deprived governments worldwide of more than $US200 billion in tax revenues.
The researchers, with the UK-based International Centre for Tax and Development, said multinationals headquartered in the United States and Bermuda "are the most aggressive at shifting profits towards tax havens".
It named the Cayman Islands, Luxembourg,
Bermuda, Hong Kong and the Netherlands as the countries gaining the most
from multinational companies shifting profits.
Jeffrey Sachs is one of the world's leading economists and the director of the Center for Sustainable Development at Columbia University.
He told ABC RN Breakfast on Friday that "the corporate tax system is a scam" and the "US is a key player that has stopped reforms repeatedly".
"We have a very corrupt political system where the companies pay campaign contributions and they get the tax code written the way they want," he said.
He said he was grateful Ms Yellen, had now "taken up the cause".
"It's vital not only for the US economy, which is bleeding deficits and has had a collapse of corporate revenues, but it's vital for poor countries also, which need to tax companies so that these poor countries can provide public services," he said.
Mr Sachs said if the US, UK, Europe, China and Japan cooperate on this, "I don't think the little islands are going to be able to confidently book a lot of money".
What's the ideal global minimum rate?
Major economies, including Australia, have already signalled they are open to a global minimum tax. The issue will be sorting out what rate, how it's applied and how it's enforced.
Treasurer Josh Frydenberg told ABC News, "Australia will remain an active and constructive participant in these discussions".
The federal government had considered introducing a digital tax but then opted to wait for the OECD process.
The leaders of France and Germany have also publicly signalled support for the United States' calls for a global minimum tax.
And
the OECD's incoming secretary-general, former Australian finance
minister Mathias Cormann, told the Financial Times that he's
"optimistic" about reaching a global minimum.
The other uncertainty is how soon the minimum rate could be implemented. Reports that a global minimum tax could be on the cards by year's end seem highly optimistic, since there would need to be agreement among OECD and G20 nations on what the minimum rate would be.
Over the years there have been discussions of a rate as low as 12.5 per cent to as high as 30 per cent. Many are now speculating the minimum rate could be set at 21 per cent, since the Biden administration has signalled it wants to raise the US corporate tax rate to 28 per cent.
Low-tax nations Ireland, Singapore may resist
The other major roadblock will be getting smaller countries such as Ireland and Singapore on board.
A number of small nations with limited resources have thrived because of their ability to set low rates, as well as offer a range of other incentives, to attract corporates and wealthy people.
Take
for example Ireland — its economy has thrived from the inflow of
billions of dollars in investment from foreign multinationals including
major multinationals including Apple.
That's likely why Ireland's Finance Minister Paschal Donohoe has already expressed his concerns about a minimum rate publicly.
He told Bloomberg television this week that, while there may now be a decision on minimum effective tax rates across the world, "we do need to be conscious that it's not just very big economies that have a need and a desire to be competitive and to grow their economies".
The other problem with implementing a minimum rate is it won't stop companies from coming up with clever accounting tricks and countries can still offer a range of tax incentives and/or exemptions to attract business.
The other issue will be how can countries enforce this?
The reason it has taken so long to get agreement on the OECD plan to tax multinationals is because businesses have lobbied hard against any moves that they believe could result in double taxation and increased compliance costs. You can expect they will continue to lobby if they see the minimum rate as disadvantageous.
There's also a question of what China will do given Hong Kong's status on tax transparency.
The Tax Justice Network's 2020 Financial Secrecy Index, which rates countries based on financial transparency, ranked the Cayman Islands as the world's biggest contributor to financial secrecy, followed by the US, Switzerland and then Hong Kong.
It's also entirely possible some countries may not decide to abide by a global minimum tax rate.
Despite all these challenges, with the US administration now changing its rhetoric on global tax policy, the idea of a global minimum rate is no longer a fantasy.
And if, in the end, the impact is getting some more tax, rather than no tax at all, that's a much fairer outcome for most non-corporate taxpayers who don't have the luxury of shopping around for a lower tax rate overseas.
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